UPDATE 1-Moody's bracing for default by city of Stockton, Calif.

(Adds details, comments)

SAN FRANCISCO, June 13 (Reuters) - The city of Stockton,
California, faces a growing likelihood of defaulting on some of
its debt obligations as the conclusion of confidential talks
with its creditors aimed at averting bankruptcy nears, Moody's
Investors Service said on Wednesday.

Stockton is in mediation with its creditors, trying to
obtain concessions to help close a $26 million budget gap before
the July 1 start of its new fiscal year.

If the city of 292,000 people located 85 miles east of San
Francisco in California's Central Valley cannot obtain
sufficient concessions by the end of June, it may file for
bankruptcy.

"The city's ratings, even on secured obligations, could be
subject to further downgrades in a bankruptcy," Moody's said.

Stockton is the first big city in California to test a new
law requiring mediation after its leaders in February endorsed a
restructuring plan for the city's finances.

The law requiring mediation was approved in response to
Vallejo, California's controversial bankruptcy filing in 2008.
Vallejo emerged from bankruptcy last year.

Stockton's restructuring plan includes mediation and, to the
shock of many in the U.S. municipal debt market, defaulting on
some debt payments during the remainder of the current fiscal
year through June.

Rating agencies have slashed Stockton's credit rating in
response and the state controller office is investigating its
financial practices.

Gregory Lipitz, a vice president and senior analyst at
Moody's, said he is concerned Stockton is running out of time
bring it balance it books.

"Since the mediation will conclude at the end of June, the
parties involved will have very little time to ratify agreements
before the city becomes insolvent," Lipitz said.

Separately, a Moody's report said Stockton "will likely
chose to file for Chapter 9 bankruptcy primarily because the
city says that it will run out of cash on July 1 and has
indicated that it will file for bankruptcy if negotiations with
creditors fail to provide material concessions."

"Even if a bankruptcy filing is avoided through negotiation
of a settlement with labor unions, bondholders, or a combination
of the two, Stockton is likely to default on its unsecured debt,
including pension and lease obligations," the report added.

Moody's said it expects Stockton's enterprise debt and
special tax bonds to be considered special revenue obligations
protected from default and loss of principal in bankruptcy.
(Reporting by Jim Christie, Editing by G Crosse)